7/27/2009 @ 12:45PM

Taxing 'Cadillac Coverage' Won't Fund ObamaCare

Over the weekend, the administration continued to try to sell its sagging health reform plan, focusing this time on the financing aspect of it. The latest idea: taxing rich health benefits.

Whether this works will depend entirely on exactly how rich is rich.

First some background: President Obama and his advisers have repeatedly said that whatever legislation gets signed will be “revenue neutral” and that there will be no tax increases on families making less than $250,000 in income.

Those self-imposed constraints mean that the Congressional Budget Office’s scoring of the current House health bill–it would cost $1 trillion over 10 years–is a big problem. Finding that kind of money usually takes some broad tax increases.

Cuts to Medicare and other proposals already in the legislation only cover $380 billion or so. Last week, Democratic members of the House proposed a surtax on the wealthy–those with incomes of $350,000 and above would pay a 1% tax or higher, 5.4% for income above $1 million, plus various penalties to businesses that don’t offer benefits. (See: “Paying For ObamaCare: Who Gets Hit And How Hard.”)

That plan was met with resistance from House moderates and the Senate, which sent reformers looking for other options. The administration says it’s still optimistic it can find the rest of the money.

The latest idea gaining traction, and promoted during administration officials’ appearances on the Sunday morning television shows, is to make some health benefits that employees receive at work directly or indirectly taxable.

Last week President Obama appeared on Newshour with Jim Lehrer and said: “What’s being talked about now, I understand, is the possibility of penalizing insurance companies who are offering super, gold-plated, Cadillac plans. I haven’t seen the details of this yet, but it may be an approach that doesn’t put additional burdens on middle-class families.”

On
CBS’
Face The Nation Sunday, David Axelrod, senior adviser to President Obama, again promoted levying an excise tax on insurers who issue so-called “Cadillac” policies and cited $40,000 plans at
Goldman Sachs
. A senior White House official told The New York Times on Sunday that lawmakers are considering targeting plans valued at $20,000 and above.

This is new for the administration. Earlier it had sided with unions in opposing any tax-tinkering with at-work benefits. “[The president] does not want the exclusion and that’s making it difficult,” said Sen. Max Baucus, D-Mont., earlier this month, who chairs the more moderate Finance committee, which had been trying to come up with a bipartisan and 100% paid-for bill.

Non-partisan CBO chief Douglas Elmendorf had also weighed in, during testimony two weeks ago, when he argued that removing the tax deductibility of health benefits was the best financing mechanism in the policymakers’ tool box. That earned him a sharp rebuke from Senate Majority Leader Harry Reid, D-Nev., who said: “What he should do is maybe run for Congress.”

So a total exclusion likely won’t happen. But going after rich policies could be an acceptable variation. It’s a popular and populist idea, to tax so-called gold plated benefits. But how many people get them?

Looking at Goldman Sachs, the company that Axelrod referred to specifically over the weekend, the top five executives do indeed get gaudy benefits. According to the latest proxy, four of the five top managers there get health plans worth $40,543 and a fifth gets one valued at $47,837.

As with many things Goldman, the health plan is likely an extreme outlier. Most companies don’t report the exact value of their executives’ benefits, but they seem to be far less.
JP Morgan Chase
, for example, says simply that executives get the same benefits as every other full-time worker.
Charles Schwab
doesn’t say exactly how much its top folks get, but you can infer by one table in its proxy listing what the company would pay in COBRA for 14 months of severance according to a termination agreement. The totals range from $14,000 to $24,000. Smallish
Webster Bank,
in Waterbury, Conn., paid $6,000 in COBRA benefits to one departing executive over nine months.

According to the Kaiser Family Foundation, the average premium paid by employers for family coverage is roughly $13,000.

Congressional testimony by the staff of Joint Committee on Taxation hammered home the point in May that targeting only the best-compensated employees’ benefits will not raise much money. According to their calculations, for the 600,000 people who file taxes reporting income over $500,000, removing the tax deductibility of their benefits would only have raised $2.7 billion last year, a far cry from the gap that the White House is trying to fill.

Take the income level down to $100,000, remove the deductibility, and that will generate an additional $60 billion per year in revenue, according to the same testimony. Over 10 years, those savings would just about pay for the unfunded parts of ObamaCare.

Dial the exclusion all the way down to zero, which would make everyone’s benefits no longer tax deductible, and there’s a gush of money: $226 billion a year, plenty to pay for even more ambitious, expensive reform. Projecting forward, removing the exclusion entirely and assuming some inflation would raise $3.5 billion in extra tax dollars over the next 10 years.

The problem: Obama ran on a platform that he would never make health benefits for ordinary people taxable. And yet the White House must know it won’t fund its health care plan by taxing just the richest plans. The next weeks will tell whether taxing health benefits is another financing dead end or the beginning of a policy reversal that could actually fund ObamaCare.